How to Begin Building an Emergency Fund

It should go without saying that everyone needs an emergency fund. At some point in every person’s life, an unforeseeable expense or financial emergency will occur that warrants having a large amount of money readily available. Unfortunately, many people do not have savings set aside for those unexpected expenses. COVID-19 has left many without jobs or with reduced pay and shows how critical it can be to have these essential savings. It is important to understand the value of always having an emergency fund for those rainy days.

Figuring Out Where You Can Save

For people that live paycheck to paycheck, it can be hard to establish where they can cut costs to save money. A budget is an itemized summary to help you track your income and where your money is going. It will also help you realize if you are spending more than you’re earning. You will be able to determine what expenses you can cut back on to increase your income. Some common ways to cut back on spending are: 

• Skipping the daily morning coffee run
• Making meals at home instead of dining out
• Scaling down on cable TV/cell phone plan
• Cancelling unused monthly subscriptions/services

By sticking to a budget and living within your means, you will be able to put money towards building emergency savings.

Set Financial Goals

Set short-term and long-term goals for your savings. It is easier to reach a goal that is realistic instead of one that is broad and may not be achievable. For example, a short-term goal can be to contribute $500 each year to the emergency fund or saving $2,000 for a down payment on a car. A long-term goal might be to have $30,000 saved in 15 years for your children’s college education. Establish a time frame when you want to accomplish the goals. Having specific goals can help you push yourself to reach them. Your financial goals are not set in stone, so be flexible when goals and circumstances change.

Start Small 

It’s never too early or too late to start saving. Many banks require an initial minimum deposit to start a savings account, ranging from $25-$300. If you don’t have enough money to open a savings account, you can start small and work your way up. Saving spare change or a few dollars can add up quickly to open a savings account for your emergency fund.

Set up Automatic Transfers

While having all of your accounts at one financial institution is convenient and makes it easier to pay bills and transfer money from your checking account to your savings, you might be tempted to spend the money saved. If you don’t see it, you won’t miss it or be inclined to spend that money. Have your money deducted from your paycheck and deposited directly into your savings account at a different financial institution. Also, having an automatic transfer into your savings account will help alleviate the task of remembering to transfer money. Transfers can be set up monthly, bi-weekly, weekly, or daily.

Let Your Money Work for You

Your money will earn interest in a savings account. You can take advantage of compound interest. This is the interest paid on previously earned interest as well as the original deposit, which helps your savings grow faster over time.

How Much Money Should You Have in Your Emergency Fund? 

Because everyone’s circumstances and financial needs are different, there is no set number of how much you should have set aside. Generally, you should aim to have between 3-6 months of living expenses saved, but there is no such thing as saving too much money. You should try to save as much as you can because you never know what tomorrow will bring. The more money you have access to when an emergency hits, the less likely you are to rack up debt and the financial stress.